FOREX-Euro weakens as dollar holds ground despite Fed rate cut bets

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* Euro edges down before ZEW reading

* New Zealand dollar gets inflation boost

* Sterling back below $1.25

By Tommy Wilkes

LONDON, July 16 (Reuters) - The euro fell on Tuesday asinvestors waited for a sentiment reading of Germany's economy,although the prospect of more central bank easing starting withthe Federal Reserve later this month kept currency moveslimited.

The single currency stood at $1.1251EUR=EBS in earlyLondon trading, down slightly on the day.

Foreign exchange markets have been notably quiet in recentweeks, with investors focused on economic data releases todecide when and by how much central banks will seek to stimulatetheir economies.

Volatility in currency markets has plummeted in recentweeks, according to the Deutsche Bank Currency Volatility Index .DBCVIX .

Markets expect the Federal Reserve to cut rates later inJuly, but the dollar has held its own. The dollar index was up0.1% at 97.035 .DXY , a fair way from its June lows of 95.843.

The ZEW economic sentiment survey in Germany is due at 1000GMT, while U.S. retail sales numbers for June arrive later onTuesday.

Commerzbank analysts said they expected the dollarexchange-rate reaction to the US data to be modest. It wouldonly strengthen once Fed officials confirmed its direction, theysaid.

Sterling was back on the ropes, falling below $1.25 asBrexit and economy concerns weigh ahead of British labour marketdate for the month of June due at 0930 GMT.

The yen dropped 0.1% to 108.05 yenJPY= per dollar.

The U.S. currency rose to a six-week high of 108.990 yenlast week but slid after Federal Reserve Chairman Jerome Powellset the stage for a rate cut later this month by highlightinguncertainties facing the world's largest economy.

The dollar lost further ground against the yen towards theend of last week after Chicago Fed President Charles Evans saidon Friday that "a couple" of rate cuts were needed to boostinflation. urn:newsml:reuters.com:*:nL2N24D0RM

"Dollar/yen has strengthened its correlation with U.S.yields since mid-May, rather than move in step with equityprices," said Daisuke Karakama, chief market economist at MizuhoBank.

The yen, a safe haven, has often depreciated when strongerinvestor risk appetite has boosted equities. But the correlationhas weakened in the face of falling U.S. yields, which has seenthe 10-year yield US10YT=RR decline to near three-year lowsthis month amid looming easing by the Fed.

The New Zealand dollar NZD=D3 rose 0.2% to $0.6729, pushedhigher by a strong inflation reading. urn:newsml:reuters.com:*:nL4N24G43S

The Swiss franc, which as a perceived safe haven hasbenefited from concerns about the euro zone economy, rosemarginally to 1.1077 francs per euro EURCHF=EBS , not far fromtwo-year highs of 1.1057 touched in June. (Additional reporting by Shinichi Saoshiro in Tokyo; Editing byAngus MacSwan) ((thomas.wilkes@thomsonreuters.com))

This article appears in: Fundamental Analysis , Stocks , World Markets , Economy , 401k , Retirement
Referenced Symbols: EFX ,

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